The ACA, Provider Mergers and Hospital Pricing: Experimenting with Smart, Lower-Cost Health Insurance Options
California Western School of Law
CWSL Scholarly Commons
Faculty Scholarship
2015
The ACA, Provider Mergers and Hospital Pricing:
Experimenting with Smart, Lower-Cost Health
Insurance Options
Susan A. Channick
California Western School of Law, XXXXXXXXXX
Follow this and additional works at: http:
scholarlycommons.law.cwsl.edu/fs
Part of the Health Law and Policy Commons, and the Insurance Law Commons
This Article is
ought to you for free and open access by CWSL Scholarly Commons. It has been accepted for inclusion in Faculty Scholarship by an
authorized administrator of CWSL Scholarly Commons. For more information, please contact XXXXXXXXXX.
Recommended Citation
Susan Adler Channick, The ACA, Provider Mergers and Hospital Pricing: Experimenting with Smart, Lower-Cost Health Insurance
Options, 6 William & Mary Policy Review XXXXXXXXXX).
http:
scholarlycommons.law.cwsl.edu?utm_source=scholarlycommons.law.cwsl.edu%2Ffs%2F161&utm_medium=PDF&utm_campaign=PDFCoverPages
http:
scholarlycommons.law.cwsl.edu/fs?utm_source=scholarlycommons.law.cwsl.edu%2Ffs%2F161&utm_medium=PDF&utm_campaign=PDFCoverPages
http:
scholarlycommons.law.cwsl.edu/fs?utm_source=scholarlycommons.law.cwsl.edu%2Ffs%2F161&utm_medium=PDF&utm_campaign=PDFCoverPages
http:
network.bepress.com/hgg/discipline/901?utm_source=scholarlycommons.law.cwsl.edu%2Ffs%2F161&utm_medium=PDF&utm_campaign=PDFCoverPages
http:
network.bepress.com/hgg/discipline/607?utm_source=scholarlycommons.law.cwsl.edu%2Ffs%2F161&utm_medium=PDF&utm_campaign=PDFCoverPages
mailto: XXXXXXXXXX
WILLIAM & MARY POLICY REVIEW [VO1. 6:2
1
THE ACA, PROVIDER MERGERS AND
HOSPITAL PRICING: EXPERIMENTING
WITH SMART, LOWER-COST HEALTH
INSURANCE OPTIONS
Susan Adler Channick1
This paper addresses the issue of whether the recent significant uptick in provider
mergers and the implementation of the Affordable Care Act have a particularly adverse effect on
provider pricing in the commercial insurance market. Uncompetitive provider markets
exace
ate already existing high cost issues such as lack of transparency in provider pricing,
patient behavior that conflates reputation and quality, and payers’ inability, or at least
eluctance, to exclude high-price providers from their networks. The ACA’s incentives for
providers to coordinate patient care and hospitals’ revenue losses from reductions in Medicare
eimbursement create further rationales for consolidation. The burden of finding solutions to
high non-transparent provider pricing is on all stakeholders who should be experimenting in
earnest with remedies for the harms that high health care costs create for patients. But no
stakeholders have more incentive to find solutions than those who ultimately pay for health care:
the insurers, the employers, governments and individuals. The recent literature is replete with
payer experiments in insurance design that are intended to provide smart, lower-cost options for
consumers and may influence provider behavior as well. More experimentation with remedial
measures is wa
anted and appears to be ongoing even among providers who also see the
prove
ial handwriting on the wall. The ACA promises health care security by creating near-
universal, affordable, adequate health care. The work continues to achieve these goals.
I. INTRODUCTION
In the past four years, hospital merger and acquisition activity has again been on the rise
after a period of relative quiescence. The anticipated effects of the Affordable Care Act on
hospital reimbursement and the impact of an already consolidated payer market are pushing both
for-profit and nonprofit hospitals toward consolidation in order to survive.2 While the hospital
market had already experienced a wave of consolidation in the early 1990s in response to the
power of private payers to negotiate high-risk, low reimbursement managed care contracts,3 the
cu
ent provider reimbursement environment is creating additional downward pressures that have
1 Professor, California Western School of Law; B.A., Cornell University; J.D., California Western School of Law;
M.P.H., Harvard University
2 Chris Myers and Jason Lineen, “Hospital Consolidation Outlook: Surviving in a Tough Economy,” Hospital
Financial Management Association, November 2009,
http:
www.navigant.com/~/media/WWW/Site/Insights/Healthcare/Hospital%20Consolidation%20Outlook_Healthc
are.ashx.
3 Gerald Adolph et al., “The Coming Surge in Health Provider M&A: How Historical Forces and Healthcare Reform
Will Combine to Drive Activity,” Strategy& (formerly Booz & Company), 2012.
2015] THE ACA, PROVIDER MERGERS AND HOSPITAL PRICING
2
affected hospitals’ bottom lines.4 The ACA’s new reimbursement models reward providers for
developing coordinated patient care models to replace the fragmented, fee-for-service
eimbursement model that has been the hallmark of Medicare since its inception. Both Medicare
and commercial payers are reimbursing providers for integrated care providing an impetus for
oth horizontal and vertical provider integration in order to achieve economies of scope as well
as scale.5
While mergers could be a boon for hospitals by creating efficiencies of scale and scope,
mergers have been shown to lead to higher prices for consumers. Studies on hospital pricing
suggest that expensive hospitals are often the result of patient demand for the “must-have”
hospitals that are usually either part of a large consolidated health system or have a university
affiliation, or offer unique Level I services.6 A number of studies have demonstrated that the
imbalance in power between consolidated providers and payers leads to higher health care costs
for consumers.7 Martin Gaynor, professor of economics and health policy at Carnegie Mellon
University, has testified before the House Committee on Ways and Means Health Subcommittee
that, “The research evidence shows that providers in more concentrated markets charge higher
prices to private payers, without accompanying gains in efficiency or quality.”8 Higher-priced
concentrated provider markets appear to be a result of hospitals consolidating in order to provide
coordinated, integrated care at greater efficiencies.9 For legislation that seeks to bend the health
care cost curve, the incentives of the ACA may actually be driving the costs of health care higher.
And, if Professor Gaynor’s data are accurate, higher prices do not result in any value added for
the patient or for the system.
Recent studies have also shown an increase in hospital acquisitions of physician practices
in order to be prepared for the coming integration of the health care delivery system.10 A 2011
eport found that “[m]ore than half of practicing physicians are now employed by hospitals or
integrated delivery systems, a trend fueled by the intended creation of accountable care
organizations (ACOs) and the prospect of more risk-based payment approaches.”11 From a health
care delivery perspective, this trend toward vertical integration supports the goal of coordinated
care; from a market perspective it is troubling because it further consolidates the provider market,
4 Jeff Goldsmith suggests that forces other than the ACA are at work. Cuts in Medicare reimbursement as well as a
concerted push by Medicare to reclassify sub-acute admissions as observation stays increasing observation stays by
34% and decreasing acute admissions have by almost 8%. Jeff C. Goldsmith, “Can Hospitals Survive? Part II,” The
Health Care Blog, March 13, 2014.
5 Laura Summer, “Integration, Concentration, and Competition in the Provider Marketplace,” 2010,
https:
www.academyhealth.org/files/publications/AH_R_Integration%20FINAL2.pdf.
6 Robert A. Berenson et al., “The Growing Power of Some Providers to Win Steep Payment Increases From Insurers
Suggests Policy Remedies May Be Needed,” 31 Health Affairs XXXXXXXXXX).
7 Martin Gaynor and Robert Town, “The Impact Of Hospital Consolidation – Updates,” Robert Wood Johnson
Foundation, June 2012, summarizing hospital concentration studies since 2006 for an association between hospital
concentration and prices.
8 Health Care Industry Consolidation: Hearing before the Subcommittee on Health of the House Committee on
Ways and Means, September 9 2011, (statement of Martin Gaynor)
http:
waysandmeans.house.gov/uploadedfiles/gaynor_testimony_9-9-11_final.pdf.
9 Martin Gaynor, “Competition Policy In Health Care Markets: Navigating the Enforcement and Policy Maze,” 33
Health Affairs XXXXXXXXXX).
10 Scott Baltic, “Monopolizing Medicine: Why hospital consolidation may increase healthcare costs,” Medical
Economics (2014).
11 Robert Kocher, M.D. and Nikhil Sahni, “Hospitals’ Race to Employ Physicians – The Logic behind a Money-
Losing Proposition,” The New England Journal of Medicine 364, XXXXXXXXXX): 1790.
WILLIAM & MARY POLICY REVIEW [VO1. 6:2
3
creating market power that converts into less competition and higher prices for payers who are
ultimately individual purchasers and employees.12 While there is little argument in the health
care community that integrated care can be value-added, the fear that provider integration will
ecome market concentration seems well-founded.13
The question that this paper addresses is what can be done to remediate the effects of
oth existing and future market concentration on the price of health care. Antitrust legislation
can often prevent illegal market dominance, but it cannot prevent integration that is lawful, nor
can it prohibit the legal monopolist from charging whatever prices it can obtain from its market
dominance. 14 In addition, antitrust law generally is ineffective in undoing monopolistic
transactions that have already created high-priced health care markets.15 Ensuring affordable
health care is essential not only to the success of the ACA but also to the success of the United
States in constraining the growth of health care spending. Although there are many variables to
health care spending, there is little doubt that provider pricing is key.16
II. HEALTH CARE SPENDING AND THE ECONOMY
Health care spending is a key component of any industrialized country’s economy. The
enefits of a robust health care system are many, most importantly ensuring healthy and
productive lives for its population.17 Mature health care systems are costly but none as costly as
the U.S. health care system.18 The 2013 spending for the United States both in the public and
private sectors was $2.9 trillion, accounting for 17.4% of gross domestic product, as reported by
the Centers for Medicare and Medicaid Services.19 Unlike other sectors of the U.S. economy, a
large portion of this spending is publicly funded, i.e., the federal government and the states bear
at least some portion of the costs of health care. The burden of high health care costs has already
had a powerful impact on state and federal budgets in the public sector20 and on employers,
employees, and individuals in the private sector.21 Health economists have long recognized the
need to “bend the cost curve” by controlling the rate of health care cost growth.